February 9, 2016    6 minute read

The Economics of Fair Trade: Unfair Fair Trade

   February 9, 2016    6 minute read

The Economics of Fair Trade: Unfair Fair Trade

The production of coffee and trade links several poor rural areas to global markets. An abundance of initiatives, in recent years, have emerged, which aim to make the connection between coffee production and trade socially responsible and environmentally sustainable. In particular, Fairtrade certification claims to adopt the strongest standards of social justice to support democratic producer organisations, facilitate premiums for social development, improve labor laws, and provide long-term trading relationships amongst manufacturers. To some extent, however, I question Adam Smith’s statement, with regards to analysing the ethical basis of Fair Trade certification; he says,

“I have never known much good done by who’s who affected to trade for the public good” 

While Fair Trade bids to add a variety of institutional and corporate forms that exist within the market economy, as well as suggesting that production or purchase of Fair Trade produce represents higher moral norms than other business activity, others, such as the Fair Trade movement, argue that Fair Trade can be detrimental to the developing world. They claim amongst others that little money reaches the developing countries; with even less money reaching producers, it creates an inefficient market system through corruption and the rich becoming richer, adopting unethical selling techniques, and misleading volunteers. Therefore, I will be analysing both sides of the economics of Fair Trade. Below I will pose several difficulties with the fair trade model of doing business. For the sake of simplicity, though, I will solely focus on fair trade coffee as I intend to analyse the market where the arguments of the Fair Trade movement appear to be at their strongest.

The terminology ‘Fair Trade’ can be imprecise and vague at times, as it is commonly used to define not only the Fairtrade certification system of the Fairtrade Labelling Organisations International (FLO International), which sets the standards for Fairtrade certification and is a worldwide network of Fair Tarde organisations, but also all generic efforts to make global trade improve support for deprived farmers and developing countries, including all other labeling schemes. While the Free Trade movement believes that free trade harms the poor and that business is set by the richer trading nations and consequently deemed unfair, Fairtrade, which is more commonly referred to the International Fairtrade Certification Mark, offers an alternative approach to conventional trade that is based on partnerships between producer and consumer. The Mark was adopted by the FLO International in 2002 to unify several labeling schemes for selling retail Fair Trade products worldwide. Certification and inspection of the labeling schemes under Fair Trade are performed by FLO-CERT, and independent body generated by FLO International.

(Source: The Economist)

It is too simple, though, to assume that there is a correlation between the introduction of Fair Trade and the capital inflows to least developed countries. Fairtrade, despite its intention to improve trade between consumer and producer, has been subject to political criticism; with calls for stricter Fair Trade standards and change from the current system, which incorporates partnerships with mass retails and multinational corporations, to more reasonable autonomous trading system. Political criticism primarily stems from the fact that the Fairtrade system is a Western consumerist view of justice. “A key issue is therefore to make explicit who possesses the power to define the terms of Fairtrade, that is who possesses the authority to determine the need of an ethic in the first instance, and subsequently command a particular ethical vision as the truth.”

“A key issue is therefore to make explicit who possesses the power to define the terms of Fairtrade, that is who possesses the authority to determine the need of an ethic in the first instance, and subsequently command a particular ethical vision as the truth.”

Fair Trade is also generating a shift from lower to higher value producing, which questions whether Fair Trade contributes to sustainable development. Applying development theory it is evident that while fixed or subsidised prices, resource transfers and higher consumption could temporarily increase welfare, there are no guarantees of positive outcomes being sustainable. In its place, inferior economies are forced to generate endogenous economic growth by investing current resources in expanding value-added and increasing income; an aim that incorporates two processes both considered crucial when achieving sustained growth.

The first, economic diversification, which enhances the level of revenue for individual entrepreneurs, while the second process is structural change, which refers to a series of shifts in the activities of the economy in which individual producers are active. The application of both methods to the export sector (the foremost distress considering the export orientation of Fair Trade commodities) is most promising to achieving endogenous growth. Less developed economies need to look at Thirlwall’s Law and analyse the contribution of Fair Trade and whether it helps avoid a balance of payments constraint on economic development.

Additionally, in the overproduction theory, critics argue that Fairtrade harms all non-Fairtrade producers. If farmers are paid higher prices and receive advice on better techniques, both will lead to an increase in output being sold to the global economy. Economists, assert that the demand for coffee is inelastic and therefore a greater price for Fairtrade, which produces a small increase in supply, will lead to a fall in market price, helping perhaps a million Fairtrade producers receive a higher rate while 24 million others receive a lower price. Furthermore, the Fairtrade minimum price could lead to a collapse in the world market price for coffee, which will predominantly affect the non-Fairtrade producers.

While this is detrimental towards developing economies, in developed countries such as Britain, Fairtrade promotes itself as the sole ethical labeling system worth considering; insisting that it refuses to oversee a system of charitable transfers but instead to maintain a moral pressure on consumers. This raises the argument that Christians have the moral obligation to buy Fairtrade products. The purchase of Fairtrade products is regularly promoted as an obligation, whereas the acquisition of non-Fairtrade products is “described by one priest as a sin worse than theft by another as a deliberate choice to take from the poor.” The Fairtrade Labelling Organisation does not possess a monopoly of virtue, and instead other companies active in the ethical market have a more positive effect on developing economies.

It should be clear that Fairtrade does not always lead to the expected outcome, often having an adverse impact on the economy and society, predominantly in the long-term. It is understandable why people seek moral justification and purchase Fairtrade goods. However, people should also comprehend the supply chain of their products better. Fairtrade is not a model for long-term development; however it does support moral norms, which can eventually lead to trade liberalisation and benefit the economy.

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